As a business expands, the number of tasks and people grows with it, making it difficult, if not impossible, for a single person to oversee all employees. How the business chooses to define its organizational structure – how jobs and functions are grouped and how reporting structures and operational relationships are defined – is important to the company's success. While departmentalization, which groups jobs into a logical arrangement, is necessary to allow a business to continue functioning, there are different ways to organize the company, each of which has its own disadvantages.

Problems of Functional Departmentalization

The oldest organizational structure is the functional model, and most large organizations use functional departmentalization to groups jobs by function; for example, the marketing department, the finance group and the research and development team. Functional experts are hired to staff and manage within the department, which can make it easier for employees to share job knowledge and information.

While this can enable teams to work faster in a smaller company, as the company grows, alignment by function can result in both a narrow focus on department goals and a lack of interaction and communication with other groups. While cross-functional teams can help mitigate these issues, members can be spread thin across multiple cross-functional projects, which can lead to late, low-quality or dropped tasks.

Problems of Product Departmentalization

Larger companies offering multiple products or services sometimes organize around these offerings. Product departmentalization enables all team members, regardless of job function, to focus on the product itself, which creates expertise and team-wide pride in the product.

As with functional departmentalization, however, team members may become too narrowly focused on their product and can miss the bigger picture of how their product fits into corporate strategy and the target customer environment, especially when other company offerings are involved. Product departments also mean hiring more functional experts, because these employees are not shared across groups.

Problems of Customer Departmentalization

Financial institutions are among those businesses that organize around specific groups of customers; for example, a bank might have a consumer, business and mortgage teams. As with product departmentalization, customer departments include employees from functions across the company who perform their specific jobs to serve customer needs.

Customer-focused departments often have disadvantages similar to product-based departments: the team’s focus can be too narrow and there can be additional cost when hiring a functional expert for each department. Even when organized to focus on customer acquisition and satisfaction, a company needs to ensure teams are aware of and working toward overall corporate strategy.

Problems of Location Departmentalization

Local services, such as hospitals and police departments, are often organized by location out of necessity. Other companies deliver global offerings but still choose to organize by location to better serve regional customer needs and navigate often-confusing local business practices.

As with product and customer departmentalization, location departmentalization can come with a higher overhead, as functional experts need to be hired for each location. Since regional departments can be hundreds and thousands of miles away from headquarters and one another, teams are more likely to focus on department goals, sometimes to the detriment of the company.